The annual allowance is a threshold which restricts the amount of pension savings you are allowed each year before tax charges apply.
The NHS pensions agencies are obliged to send you an annual allowance statement when the growth in your pension has exceeded the standard annual allowance (currently £40,000) in any one pension scheme.
What's included in your statement
The annual period being assessed for growth is 6 April to 5 April, in line with the tax year, and is known as the pension input period.
Members who have been in the 1995/2008 sections and are now in the 2015 scheme will receive a statement if the total combined growth, across both schemes, exceeds the standard annual allowance.
The statement will include NHS added years and additional pension growth. Other NHS additional voluntary contributions or NHS stakeholder pensions are not included in the statement.
Additional pension savings, including with other providers, will also need to be taken into account when determining whether you have a charge to pay.
The standard annual allowance (or the reduced and tapered allowance) is your annual limit across all pension savings and not your limit in relation to each scheme.
Higher earners and tapered allowance
Higher earners (broadly with taxable income over £200,000 after pension contributions have been deducted) may have a lower tapered annual allowance than the standard allowance of £40,000.
This is because for higher earners, the standard annual allowance limit tapers down (possibly to £4,000). You can check to see if you are affected by working out your tapered annual allowance on GOV.UK.
Members with defined contribution pension savings which have been flexibly accessed may also be subject to a reduced alternative annual allowance.
If you are a higher earner who is affected and you are subject to a reduced tapered annual allowance, the scheme will not know of this (as all of your earnings are taken into account and not just NHS earnings).
Agencies will continue to send statements only when the standard annual allowance (£40,000) has been exceeded. Equally, if you are subject to the alternative annual allowance, you may need to request a statement to check your liability to tax. This can be done by contacting the scheme directly:
Phone: 01896 893 000
HSC (Northern Ireland)
Phone: 028 7131 9111
GPs will not receive statements when they are due as the NHS pensions agencies are only able to issue them once certified income (and therefore confirmed pension growth) details are known.
It may be necessary to use an accountant to estimate your position in order to be able to complete tax returns and use scheme pays to meet tax charges. These estimates can then be amended within four years of the relevant tax year.
If you exceed the annual allowance limit
Your statement (or combined statements) showing growth above the limit allowed does not necessarily mean that you will be subject to a tax charge.
Using previous unused allowance
You are allowed to carry forward unused allowances from the three previous years. This may be sufficient to mean that excess growth over the limit is covered by the allowance carried forward.
You are able to assess your position, including carry forward, by using this HMRC tool.
The HMRC tool requires that you know what your previous three years annual allowance position has been. If you have exceeded your annual allowance limit in any of the last three years, you will need to go back three years prior to that to show your true carry forward position.
If you have enough carry forward to eliminate the excess, there is nothing further you need to do and the fact does not need to be declared anywhere.
If you still have an excess
If, after using carry forward, you still have an excess, this is taxed by adding the amount to your taxable income and paying tax at your marginal rate of income tax.
Paying the charge
The charge needs to be declared and paid for either by cash on completing a tax return or by using scheme pays (a loan from the scheme recouped with interest from your pension at retirement). Read our guidance on using scheme pays.
Please note the principles of the above as the specifics in relation to the standard and tapered allowance and marginal rates of income tax may vary.
Both methods of payment need to be declared on a tax return and require supplementary form SA101, along with the tax return.
Deadlines and scheme pays
There are deadlines for declaring and paying any annual allowance charge.
The deadline for cash via a tax return is 31 January following the end of the relevant tax year. For example for 2021/22, the tax return needs to be in by 31 January 2023.
If your charge exceeds the standard annual allowance (rather than any personal tapered allowance) and is more than £2,000, it can be met by use of the mandatory scheme pays facility. The deadline to return the completed SPE2 form to the scheme is 31 July in the following year.
If your charge is less than £2,000 or exceeds your tapered allowance but not the standard allowance, it can be met by use of the voluntary scheme pays facility. The deadline to return the completed SPE2 form to the scheme is 31 July in the following year. Sometimes the scheme extends the deadline for receipt of the voluntary scheme pays election.
If you want the scheme to pay the charge via scheme pays you need to complete the SPE2 election form. You can find forms and deadlines in our guidance on scheme pays.
When using either the mandatory or voluntary scheme pays facility, interest accrues on the charge until the scheme pays the monies over to HMRC.
Interest accrues from an earlier date in relation to voluntary scheme pays and you are solely liable for that.
Please refer to the table on page 30 of the comprehensive NHSBSA guide to the annual allowance for more information on the interest charges.
Alternative options for pension contribution
Active members of the NHS pension scheme who are affected by the annual allowance or lifetime allowance can either:
- continue in the NHS scheme and bear any additional tax charges that arise
- opt out of the NHS scheme and be paid a separate cash payment.
For more information on opting out of the scheme, please see our guidance on the pension contribution alternative reward policy below.